PPZ ExL presentation, 6-23-2011

INTRODUCTION TO “PAY-FOR-DELAY” SETTLEMENTS: CHALLENGES AND CONCERNS

Patrick P. Zaretski, Esq.

ExL Pharma Conference – Pharmaceutical and Life Science IP Protection June 23, 2011

ExL Pharma Conference – Pharmaceutical and Life Science IP Protection, June 23, 2011

Introduction

• “Pay-for-delay” settlements, also known as “reverse payment settlements,” are payments by pharmaceutical patent holders to generic manufacturers in return for settling challenges to the patent's validity. This has the ancillary effect both of delaying the introduction of generic drugs into the market and of extending the patent holders’ market exclusivity...and therefore patent holders’ profits.

• Pay-for-delay settlements are currently estimated to be worth upwards of $20 billion in sales to pharmaceutical patent holders, and the Federal Trade Commission (“FTC”) estimates that reverse payment settlement cost consumers $3.5 billion per year, or $35 billion over the next ten years.


Introduction (continued)

• While the federal courts, including the United States Supreme Court, have remained largely silent on the issue of whether pay-for-delay settlements are illegal restraints of trade under the Sherman Antitrust Act (15 U.S.C. 1, et seq.), and while Congress has refused to address the issue, the FTC has become increasingly strident in its opposition to such financial arrangements, holding before both courts and Congress that pay-for-delay settlements are per se illegal restraints of trade.

• According to the FTC, due to “the [allegedly] inherently anticompetitive nature of these deals and the enormous consumer harm caused by pay-for-delay...[o]ne of the Commission's top competition priorities is stopping ‘pay-for-delay’ agreements between brand-name pharmaceutical companies and generic competitors that delay the entry of lower priced generic drugs into the market.”


Introduction (concluded)

• In turn, again according to the FTC, "[d]elays in generic competition harm all those who pay for prescription drugs: individual consumers, the federal government (which purchases roughly one-third of all prescriptions), state governments struggling with the cost of providing access to health care, and American businesses striving to compete in a global economy.”

• Thus, even though the federal court system and Congress have remained on their side to date, pharmaceutical patent holders should continue to expect strong opposition from the FTC for at least the near future against any proposed pay-for-delay settlements reached with or offered to generic drug manufacturers.

Statutory Framework of Pay-for-Delay Settlements



The Hatch-Waxman Act and pay-for-delay settlements

• The Drug Price Competition and Patent Term Restoration Act of 1984 (codified at 21 U.S.C. 355(b), (j), (l); 35 U.S.C. 156, 271, 282), familiarly known as the Hatch-Waxman Act (“Hatch-Waxman”), intended to promote the availability of generic drugs while also providing the financial incentive to research and develop new pharmaceuticals.

• By permitting generic manufacturers to submit bio-equivalence studies to the U.S. Food and Drug Administration (“FDA”) rather than perform human clinical trials, Hatch-Waxman encourages FDA approval of generic medications in an expedited, cost-efficient manner.

• However, Hatch-Waxman also intended pay-for-delay settlements as a method of resolving patent infringement suits.


Hatch-Waxman and ANDAs

• Under Hatch-Waxman, a generic pharmaceutical manufacturer may file an Abbreviated New Drug Application (ANDA) with the FDA prior to the expiration of a brand-name manufacturer's patent without infringing the brand-name manufacturer's patent. The FDA publishes the patent information in the "Approved Drug Products with Therapeutic Equivalence Evaluations," also known as the "Orange Book."

• Since, prior to Hatch-Waxman, any work towards filing an ANDA constituted infringement, such work mostly could not begin in a meaningful way until after expiration of the applicable patents, effectively granting patent holders a de facto patent term extension that includes the period of time after expiration that the ANDA applicant needs to run bioequivalence studies and file its ANDA.


ANDA certifications

• In addition to demonstrating bioequivalence between its generic drug and the FDA-approved brand-name drug manufactured by the patent holder or licensee thereof, an ANDA filer must also make one of the following certifications:

1. brand-name patent information has not been filed (Paragraph I certification);

2. a brand-name patent has expired (Paragraph II certification);

3. a brand-name patent exists, including the date on which such patent will expire, with a promise not to market the generic drug until that date (Paragraph III certification);

4. the brand-name patent is invalid or will not be infringed by the manufacture, use, or sale of the new drug for which the application is submitted. (Paragraph IV certification).


Paragraph IV certifications

• A Paragraph IV certification is deemed an act of infringement on the brand-name manufacturer's patent and hence can be challenged by the brand-name patent holder in court.

• However, Paragraph IV certification also permits challenges to patents of questionable validity, which is deemed to be in the public interest.

• Therefore, to encourage such challenges, the first generic pharmaceutical manufacturer to submit a Paragraph IV certification with regard to a particular ANDA obtains a 180-day exclusivity period, thereby precluding entry of any other ANDA filer into the market.


Effect of Hatch-Waxman on patent infringement suits

• Bearing in mind both the strictures of Paragraph IV and the incentives of ANDA filing, Hatch-Waxman has had the arguably unforeseen effect of encouraging patent infringement suits.

• In order to protect their patents, brand-name manufacturers and initial ANDA filers often agree to a settlement that delays the entry of the generic drug into the market -- namely, pay-for-delay settlements.

• However, as any other ANDA files are prohibited from selling their own generic versions of the drug in question under the 180-day exclusivity period generated under Paragraph IV, pay-for-delay settlements can also effectively delay the market entry of any generic version of the drug, thereby driving the FTC’s aforementioned concerns about illegal restraint of trade.

Judicial Examination of “Pay for Delay” Settlements: Split Jurisprudence



The Sixth Circuit: Agreement with the FTC

• The Sixth Circuit held in In re Cardizem CD Antitrust Litig., 332 F.3d 896 (6th Cir. 2003) that pay-for-delay settlements are per se violations of section 1 of the Sherman Antitrust Act, in accordance with the FTC.

• Indeed, the Sixth Circuit specifically held that the terms of the agreement at issue permitted both parties to use the 180-day exclusivity period to delay the entry of other generic competitors.

• Significantly, however, no other federal court at any level has agreed with the Sixth Circuit that pay-for-delay settlements are per se illegal restraints on trade.


The Eleventh Circuit and the “exclusionary zone” test

• In Valley Drug Co. v. Geneva Pharms., Inc., 344 F.3d 1294 (11th Cir. 2003), the Eleventh Circuit, adopting an “exclusionary zone” test to evaluate the validity of a particular pay-for-delay settlement and thereby disagreeing with the Sixth Circuit that such settlements are per se illegal restraints of trade, refused to invalidate the settlement at issue in that case.

• The Eleventh Circuit held that while such a right does not have unlimited power, patent rights necessarily include the right to exclude generics from the market.

• Hence, a court must precede any specific antitrust inquiry with a threshold analysis of the exclusionary scope of the patent: if the terms of an agreement are found to have effects beyond the patent’s exclusionary effects, they may then be subject to traditional antitrust analysis to assess whether those terms violate the Sherman Antitrust Act.


The Eleventh Circuit (concluded)

• In Schering-Plough Corp. v. Fed’l Trade Comm'n, 402 F.3d 1056 (11th Cir. 2005), the Eleventh Circuit revisited and clarified the Valley Drug test, explaining that the proper analysis of antitrust liability requires an examination of the scope of the exclusionary potential of the patent; the extent to which the agreements exceed that scope; and the resulting anticompetitive effects.

• The Schering-Plough court emphasized that the agreements did in fact permit generic manufacturers to enter the market before the expiration of the patent.

• Consequently, the court held that the per se analysis performed by the Sixth Circuit is inappropriate in the context of pay-for-delay settlements.


The Federal Circuit: use of the “exclusionary zone”

• In In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F. 3d 1323 (Fed. Cir. 2008), the Federal Circuit adopted the Eleventh Circuit's exclusionary zone test to evaluate reverse payment settlements, holding that the existence of a patent entitles the patent holder to purchase protection from generic competition, absent fraud or sham litigation.


The Second Circuit: also the “exclusionary zone” test

• In two separate cases, the Second Circuit has also rejected the FTC's per se rule and held that pay-for-delay settlements do not violate antitrust laws where they fall within the exclusionary zone of the patent.

• In In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187 (2d Cir. 2006), the Second Circuit, using the Eleventh Circuit’s exclusionary zone analysis, affirmed the district court’s findings that although an agreement between a monopolist and a potential competitor ordinarily violates the Sherman Antitrust Act, such agreements are not necessarily unlawful when the monopolist is a patent holder simply because of the nature of the patent right, and the only way an antitrust plaintiff could prevail was by successfully arguing either fraud or sham existed.


The Second Circuit: also the “exclusionary zone” test

• In Arkansas Carpenters Health and Welfare Fund v. Bayer, AG, 604 F.3d 98 (2d Cir. 2010), although the Second Circuit affirmed its reasoning in Tamoxifen, it invited petitions for en banc rehearing not only after the Department of Justice (“DOJ”) urged the court to overturn Tamoxifen, but also after learning that the FTC reported that the number of pay-for-delay settlements increased after the Tamoxifen decision was handed down.

• Nevertheless, despite the earlier court’s recognition that permitting pay-for-delay settlements can sometimes lead to the “troubling” protection of potentially “undeserved” patent monopolies, the Second Circuit denied the petition for rehearing en banc in September 2010.

Current State of Play in “Pay for Delay” Settlements



• The United States Supreme Court has denied certiorari in both In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323 (Fed. Cir. 2008), cert. denied, 129 S.Ct. 2828 (2009) and in May 2011 in Arkansas Carpenters Health & Welfare Fund v. Bayer, AG, 604 F.3d 98 (2d Cir. 2010), cert. denied, 131 S. Ct. 1606 (2011).

• While the denial of certiorari is not binding precedent, it seems more than likely that the debate about the per se illegality of pay-for-delay settlements is concluded, thereby precluding any argument against such settlements in federal court save where fraud, sham, or the allegation that the terms of a particular agreement are outside the exclusionary zone of the patent in issue are specifically pleaded in an antitrust litigation.

The United States Supreme Court: silence


• On May 3, 2011, the FTC issued a report stating that in 2010, the number of pay-for-delay settlements increased by approximately 60 percent in the number of final settlement agreements filed, from 68 to 113, almost double the amount received in any previous year. Similarly, the number of both potential pay-for-delay settlements and the number of potential pay-for-delay settlements involving initial ANDA filers also substantially increased over any previous year, from 19 to 31 for the former category and from 15 to 26 for the latter category.

• On May 18, 2011, the FTC filed an amicus brief supporting Plaintiffs-Appellants in In re K-Dur Antitrust Litig., a case involving multi-district legislation before the Third Circuit, arguing again that pay-for-delay settlements are per se illegal restraints of trade under the Sherman Antitrust Act.

The FTC: current actions


• In light of the content and tone of interviews of FTC officials, and given that billions of dollars that are at stake, it is evident that the FTC and consumer and provider activists will likely continue to press their case on Capitol Hill; whether this will be successful given the current political climate is questionable.

Conclusion

Education

PPZ ExL presentation, 6-23-2011